Analysis

Did someone say manufacturing downturn?

Creating resilience ahead of a recession in manufacturing

Downturns are a natural part of the market cycle, and the more prepared a company can be heading into a downturn, the more likely it will survive and thrive during the recovery. Identify signals and patterns in manufacturing from past recessions, and learn approaches that manufacturers have employed to help create resilience in the midst of downturns.

What can companies learn from past recessions and manufacturing downturns?

The impact of downturns on industrial manufacturing has historically been more severe than other industries; however, the manufacturing sector recovers more quickly than the overall economy. A look back at past recessions suggests that they can be caused by a variety of forces―low confidence in investments, oil shocks, federal policies, even housing bubbles. But one constant is that manufacturing historically suffers worse than most other sectors.

Regardless of cause, historic data suggests that the durable goods sector is more recession-sensitive and bears a higher impact when compared with nondurables and services sectors. Durables businesses tend to hold back on their investments, and their customers tend to hold back on purchasing, during times of uncertainty. And industry GDP numbers reflect this: During the Great Recession, the US manufacturing downturn resulted in a loss of 10 percent of its GDP, compared with only 4 percent for the overall economy.

But that’s not the end of the story. Manufacturing downturns are followed by relatively faster recoveries when compared with the overall economy. Even as it experiences steeper declines during recessions, US manufacturing tends to witness higher recoveries than the overall economy during the post-recession periods (figure 1).

Recession to rebound: How manufacturers can create resilience during downturns

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What has changed since the last recession?

Fiscal policies have become more accommodating.
In response to the Great Recession, the US Federal Reserve reduced the interest rates from 5.22 percent in September 2007 to almost 0 percent by end of December that year. This was intended to encourage businesses to borrow money and enhance capital investments.

The recovery after a manufacturing downturn has become protracted.
The manufacturing downturn cost the industry approximately one-tenth of its GDP during the Great Recession of 2008―the highest-ever decline during the past 11 recessions. The manufacturing sector also posted higher 12-month recoveries compared with the overall economy. However, what’s been changing is how long it takes manufacturing to return to prerecession levels, a new wrinkle for the industry. In 2000, it took 33 months to reach prerecession levels. In the period after 2008, it took 59 months.

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Riding out the next recession: Two key approaches

Prevent liquidity crisis by increasing insights into cash flow.
Liquidity emerged as the most important metric distinguishing recession-resilient manufacturers from others. Per our analysis, manufacturers with easier access to capital and relatively lower debts were not only able to better navigate through a recession, but also posted higher revenue growth after a manufacturing downturn.

Make targeted capital investments to increase productivity.
When heading into a recession, a basic instinct is to often dial down on capital investments and wait for the onset of recovery periods.

But in Deloitte’s analysis, some industrial manufacturers invested more during the years leading to a recession (see figure 2).

As a result of these capital investments into technologies and assets, these manufacturers observed much higher revenue growth in the recovery following a manufacturing downturn.

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New decade brings new challenges for manufacturers

The US economy avoided recession for the longest time ever during the past decade. The arrival of the next decade brings with it challenges both known and unknown. Economic recessions continue to be one of the uncertainties that will likely challenge manufacturers; their causes, timing, and impact continue to perplex the whole economy. Now is the time for manufacturers to prepare using one or more of the approaches above to shield themselves during any future recession and maximize growth during the recovery period that follows.

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